Tuesday, March 29, 2005

"Does Municipal Supply of Communications Crowd-Out Private Communications Investment?"

A new study, Does Municipal Supply of Communications Crowd-Out Private Communications Investment? An Empirical Study, examines an issue we've heard a lot about here in Lafayette: How private investors will react.

It isn't uncommon to hear opponents of fiber say that it is "obvious" that if we choose to invest in ourselve, outside companies will be offended and choose not to invest here. But it isn't clear that this assumption is true—businesses don't generally make their decisions to invest in a community based on anything other than profit potential. It is an open question whether, on the balance, an inexpensive municipal network creates rich new markets thereby encouraging investment or whether it results in less potential for investors.

This isn't a theoretical or ideological question: it's one that can only be settled by going out and looking at how things turn out in the real world. That is what the authors of this study do. Here is what they found:
The municipal supply of communications services is on the rise. While constituents are generally delighted with the municipal services, incumbent firms that compete (or may do so at some later date) with these systems are unsurprisingly displeased with the rise of municipal communications. The incumbents levy many arguments against municipal entry, one of them being that public investment in communications networks crowds out private investment. In this paper, we subjected this hypothesis to an empirical test, and found no evidence to support the "crowding out" hypothesis. Indeed, the empirical model indicates that municipal communications actually increases private firm entry and, presumably as a consequence, private investment.
The paper is pretty mathematical in places but the conclusions are clear enough. The theory that public investment drives out private investment is not supported. Instead, investment in infrastructure provides the basis for a greater degree of private investment and competition.

(Thanks to Max Hoyt who highlighted this paper in a meeting I attended earlier today.)

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